Legal Outlook Energy & Resources Disputes Episode 8

The role of public international law in renewables projects - transcript

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Transcript



Jose Antonio:

Welcome everyone. My name is Jose Antonio Rodriguez, and I am a partner in Ashurst's International Arbitration team based in Madrid. This is the sixth and final instalment in our six per series of podcast on the topic of renewable energy disputes. It is a series in which we have been sharing the lessons we have learned for enacting in renewable energy disputes and our tips and tricks for avoiding and managing such disputes. Today, I am joined by Mathew Saunders, the Global Head of our International Arbitration Practice, and Emmanuelle Cabrol , an international arbitration partner based in our Paris office. We will today, be talking about investment treaties, drawing on Mathew and Emmanuelle experience in arbitrating claims for and against states. The aim is to learn how such dispute might arise in the course of a renewable energy project. And what key things during need to be thinking about in this context? The first question is of course, why should clients be thinking about public international law protection in the renewable energy space?

Mathew:

I think the answer to that Jose Antonio is if you look at what renewables projects are, they generally require very significant upfront capital investment. And to attract that investment, often foreign investment, into the developing economies where the projects are typically based, governments have offered a variety of support mechanisms over the years, primarily in the way of subsidies. But subsidies are inherently quite political and therefore renewables projects over their lifetime. They become very vulnerable to the political wind changing and regulatory changes taking place. Maybe politics, maybe because of technological changes. But what that means is the subsidy underpinning for the project can very easily change, very easily alter fundamentally the economics of the project, making a project that was initially very attractive, completely unattractive.

Mathew:

Public international law is not subject to or affected by changes in national law. The national law that the politicians responsible for the subsidies might change at one point. And it's important when looking at investment opportunities that any foreign investor structures, the investment project to ensure that they get the protections that are available under public international law from the very start. Restructuring once the dispute is foreseeable, generally, it'll be too late to do that.

Jose Antonio:

Okay. So what are the instruments that provide public international law protection? And in your view, what are the most important protection?

Mathew:

Well, the main instruments are bilateral investment treaties. Those are agreements between states which seek to promote foreign direct investment by guaranteeing a certain level of minimum protection. So those are bilateral between two states, and then you've got multilateral investment treaties, similar to bilateral investment treaties, but they've got multiple state signatories. By last count they were I think over 2,000 bilateral investment treaties in place, far, far, fewer multilateral investment treaties, although that picture is changing. But a particular importance in the renewable space is something called the Energy Charter Treaty. And that's probably the best known of the multilateral investment treaties. Most BITs and MITs, they provide essentially similar protections and in our view, the most important of those, are protection against expropriation, without compensation, and guarantees to provide what's called fair and equitable treatment. Also, something called the most favoured nation provision. And I'll explain that later. That's a little bit technical, but it's quite important in terms of how treaties operate,

Jose Antonio:

Right, and Emmanuelle, what does that actually mean? What do those protection prevent the state from doing?

Emmanuelle:

A protection that is often relied on by investors in renewable arbitrations is as mentioned by Mathew, fair and equitable treatment. It notably requires a state to act in a transparent manner, in a way that is not arbitrary, grossly unfair, discriminatory, to respect due process. And another aspect that has been invoked in a number of renewable energy arbitrations, either tribunals were notably asked to determine whether the investors had legitimate expectations that were breached by the conduct of the states. So if we take an example, the example of Spain. A number of investors have started arbitration against Spain for a modification of its legal regime for incentives, for investment in renewable energy. And in those cases, tribunals have notably examined whether the investor had legitimate expectations that the incentive regime would not be modified. This is a very fact-specific question and tribunals have expressed different views depending on the circumstances of the case, but in several instances, other were in favour of compensation.

Emmanuelle:

So this protection covers a wide range of actions, depending on the fact of the case, and it is certainly the most commonly invoked protection. Another treaty protection that is frequently invoked by investors, and that Mathew also mentioned is expropriation. Expropriation is obviously a very severe form of interference with property. It can be for instance, the forced seizure of a power plant, but protection against expropriation does not mean that the state cannot expropriate, but it must do so for a public purpose in not discriminatory manner, and with an adequate compensation. But in renewable cases, investor mostly invoked what is called indirect expropriation to claim compensation. So what is indirect expropriation? It is when the states conduct causes a loss of value that is equivalent to a deprivation of the investment. So for instance, it'll be a regulatory change, which destroys the financial benefits attached to the project.

Emmanuelle:

Mathew also mentioned the most favour nation provision. It is to ensure that the host state does not treat investors less favourably than investor from another country, with which the host states has a treaty entered into. So those are substantial protections, but importantly, the treaties do not only contend substantial protection, they also offer procedural protections. So all these protections are usually enforceable by means of international arbitration proceedings, which can be brought by the investor against the state itself. And this ability for investor to raise claims directly against the state before an international tribunal, outside the domestic judicial framework is a very important protection. It can be very helpful leverage when things start to go wrong. So you have not only substantial protection, it's also very important possibility to get access to a neutral forum.

Jose Antonio:

Mathew, you mentioned that investors should structure their investment project. So they are protected by public international law from the start of the project. What that this mean exactly?

Mathew:

What it means in practise is that investors should start by making sure that they've gotten their chain of ownership somewhere, an entity, which is registered in a jurisdiction that is a signatory to a relevant bilateral investment duty or a multilateral investment treaty. So just to give an example, if the investor is, let's say, looking to invest in a solar project in the Czech Republic, then what the investors should do is check what bilateral investment treaties and multilateral investment treaties the Czech Republic are signed. It's quite a few. If there's one signed with the state in which the investor has generally corporate nationality, but it can be the nationality of shareholders or can establish nationality by inserting into its ownership structure, a company which is incorporated and registered in that state, then that will likely be sufficient to allow the treaty to bite.

Mathew:

Now, it's not always that simple. It's not always enough to insert what we call a brass plate company. Sometimes you need a company, that's got a substantive economic activity, but essentially, those are the steps that need to be taken. There's always a need to check the specific wording of the relevant treaty to ensure that they will apply, and to see whether it's necessary for their company, to be more than a brass plate or a shell company. There may also be a number of potential nationalities that are available and examining the scope and the content of the different treaties may lead to a conclusion and that one jurisdiction is going to be more favourable than another. But what that all indicates, I think is that there's quite a lot of homework that can sensibly be done early on in the planning stage of the investment.

Jose Antonio:

But why is there a need to think about this at the outset of a project? Can the parties simply restructure an existing project to gain 3D protection?

Mathew:

There's nothing stopping them from restructuring in order to obtain protection, but it's going to be a great deal cleaner if the project is set up to attract treaty protection from the very start. The earlier the investor brings itself under the remit of protection under a BIT or an MIT, the better. The reason for that is that if a dispute is already on foot or foreseeable, and of course, the nature of a lot of these disputes mean it can be argued. They are foreseeable very early on. If the investor changes its nationality or inserts a company in the chain of ownership, then the argument is that there's been what we call abusive process. And the responding state, the host state is likely to run that argument. So, to avoid those arguments being advanced it's far, far better to structure the investment from the absolute start before there's any scope for a host state to argue that the dispute was already on foot when the change was made, or was foreseeable when the change was made.

Jose Antonio:

Emmanuelle, Mathew has mentioned the possibility of arbitration under an investment treaty. How is that different from commercial arbitration?

Emmanuelle:

Well, there are a number of important differences. For instance, when you have a treaty, it's different when it comes to the breach, that can be invoked. Claims under a treaty arises from the breach of the treaty protections. And we have mentioned some of them earlier and there are, in addition to any claim that maybe available under the contract. And it can very useful because sometimes the conduct of the state cannot really be related to a breach of a specific close of a contract, but it can fall under a protection that is offered by a treaty. So in fact, investors could claim compensation, both for a breach of the contract, and breach of a treaty. So the treaty will offer an additional protection, which can be very helpful. Other differences are for instance, greater transparency of the process. The fact that as a treaty comes into play, there will be public international law that will apply.

Emmanuelle:

And also there can be a difference in the process itself. We say that treaties will provide for arbitration to be available in order to enforce the treaty protection, they can typically provide for ICC in some trial. They can also provide for ICSID, and ICSID is a treaty-specific in this respect. ICSID, it is an institution created by an international convention in 1966. It is an institution linked to the World Bank and it is specifically devoted to investment disputes. So it is something very peculiar. ICSID arbitration only applies to disputes between a state and a foreign investors, and it must relate to an investment. And the state and the foreign investor must come from countries that are parties to the ICSID Convention.

Emmanuelle:

The good thing with ICSID is that the process has been suit and entirely conceived for this. It is tailor-made for this type of disputes, really tailor-made for investment arbitration disputes. For instance, there is no involvement of domestic courts even to Novi Award. And you learnt only limited grounds is inside the ICSID system, the ICSID process, and a key benefit also of ICSID arbitration is that awards are directly enforceable as final judgements of domestic court would be in all states that are party to the ICSID Convention, and there are many of them around the world, more than 150. This is a very strong advantage.

Jose Antonio:

And is investment arbitration only relevant when the state is involved directly in the project?

Emmanuelle:

Well, not at all, in fact, so Mathew mentioned before that this treaty can provide helpful leverage when things start to go wrong due to measures taken by the state, even if the state is not involved in the specific project. And in fact, in a heavily regulated industry, like the renewable sectors, claim often arise from changes to the legislative framework. This will is a case for instance, in a number of recent cases involving Spain, Italy, Czech Republic, and more recently Ukraine. Such transactions do not usually take place overnight. And investors sometimes have some indication that adverse action is imminent, being aware of their public international rights. And the means to enforce them through arbitrary can be very effective and can help investors to engage with the government to potentially prevent adverse actions from being taken.

Jose Antonio:

And Emmanuelle, what are the key things that client considering investment arbitration should be aware of?

Emmanuelle:

Well, there are a number of procedural points that need to be borne in mind, depending on the specific treaty and its provisions. We can think for instance, about Cooling-off period, exhaustion of local remedies, or fork-in-the-road provisions. So for instance, Cooling-off periods, that mean that the arbitration may not start immediately. It is not immediately available. The treaty may provide that the investor can commence proceedings for a certain period of time, usually three or six months. And that during that time there must be attempt to amicably resolve the dispute with the state. Exhaustion of local remedies, that means that under some treaties, there is a requirement that the investor will exhaust all local treaty remedies before submitting claim to arbitration, and fork-in-the-road is also a condition, a provision that is provided in some treaties that require the investor to choose to either push its claims to arbitration, or before local courts, or the forum provided.

Emmanuelle:

So for instance, the fork-in-the-road provision was invoked in a case called Sharon versus Spain in the renewable energy sector. And Spain's objection was based on prior unsuccessful challenge wrote before the Spanish Supreme Courts and the European Courts of Human Rights. But in this specific case, the tribunal rejected the objection because the parties in the local courts and in the arbitration were not exactly the same. So one was be careful before commencing proceedings in local court, because in some cases, they may have some impact and could prevent from initiating arbitration proceedings, but it is only in specific cases.

Jose Antonio:

You have both mentioned that changes in the legislative framework are a common catalyst for investment treaty disputes in the renewable and industry. We have seen this play out in Spain, Czech Republic, and Italy in particular. Those states have introduced the incentives such as Feed-in Tariffs and other government subsidies to encourage investment in the sector. But in the context of the global economic downturn have removed or reduced such incentives, which has led to avoid for claims by investors, especially in the case of Spain, have somewhat dominated the investment treaty dispute for over a decade. Mathew, do you think we are coming to an end of these types of claims?

Mathew:

In short, no. You only need to look at events over the last few days, COP26 and the subsidy regimes that will come out of that to know that this area is going to continue. In fact, there've been claims filed against Spain, even this year, not withstanding the fact of past legislation aimed ending treaty claims out of its 2012 and 2013 renewable energy reforms. So maybe the current round of claims involving Spain will dry up. But there'll be other catalysts in maybe in other states. And as I say, you can see developments around COP26 and move to net zero are going to support the very kind of further subsidies raising, it's inevitable. In the more immediate future, I think states will look to withdrawing or amending subsidies or incentives as part of the economic recovery post COVID-19. And there'll be changes to subsidies.

Mathew:

New technologies will come along and those will attract subsidies at the expense of maybe older renewable technologies. As states put in place new incentives as part of the drive towards meeting net zero. I think one thing we learned from history, that it's only a matter of time before economic and political pressure build till these incentives become too expensive or they're restructured for a variety of reasons. At that stage, then investors are left in the same position as those in Spain, the Czech Republic, and in Italy. It's the unpredictability of this area, I think that means that that investors really do need to pay regard to the benefits they can obtain through treaty protection. They really just need to take the basic steps to protect themselves, to give them options and public international law is not always going to be the case. There's an arbitration needs to be commenced and leverage can be exercised against the host state, but to get those options, structure the investment properly. And then you've got those options available. That's really important.

Jose Antonio:

Now, at this point in the podcast, we always ask our speakers for their best renewables dispute war story. Can either of you share one with us?

Mathew:

Well, one that goes is a few years back for me, but it's in the nature of the renewable sector that projects will often take place in states that are emerging economies, where legal systems are less established, less settled, less predictable. And in those states, there are often challenges for investors. And one of those is around bribery and corruption. And a few years ago, I had calls to ask questions of somebody who'd been a very senior minister in the USSR, for the collapse of the USSR. He was then a senior minister in the Russian Federation, and he became a very senior minister, I won't name the state. He became a very senior minister in the state that we were acting for. And there were allegations that he had funnelled monies to a relative.

Mathew:

I asked him about this, and he took his glasses off and he looked at his nose and he said, "Well, Mr. Saunders, let's talk about that when you are 75, shall we?" I thought that was one of the best put downs, most comprehensive put downs I'd ever experienced. And we never did explore that particular line of questioning. It was a very diplomatic and effective way of shutting me up. So I think from the lawyer's perspective, the cases that come out of disputes in this area, that they can be particularly colourful, particularly interesting. And you get to go to lots of interesting places and meet interesting people. And occasionally they'll tell you to shut up. And that was my experience.

Jose Antonio:

Interesting. Thank you, Mathew, and thank you, Emmanuelle . That's all we have time for today.

Mathew:

Thanks a lot.

Emmanuelle:

Thank you.

Jose Antonio:

And this concludes our six-part series of podcast on renewable energy disputes. If you would like to learn more on this topic, we have published a special report called the International Arbitration Renewable Energy Disputes. Do get in touch with any of us, or your usual Ashurst contact if you would like a copy of that. Thanks for tuning in and bye for now.

Host:

If you enjoy Ashurst Legal Outlook, why not check out our other two podcast series as well. Ashurst business agenda tackles the big strategic issues that business leaders face, and ESG matters at Ashurst reveals how business leaders arising to mounting environmental, social, and governance challenges. You can listen and subscribe to business agenda and ESG matters wherever you get your podcasts.

 

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